The Department of Labor unveiled Friday a more principles-based final rule on proxy voting that did away with requirements in the proposed version requiring ERISA-governed fiduciaries to cast proxy votes any time the matter being voted on would have an economic impact on the plan but also only cast votes when there is an economic impact on the retirement plan.
The final rule, which will go into effect 30 days after publication in the Federal Register and shortly before the Biden administration takes office Jan. 20, establishes a framework for ERISA-governed fiduciaries to follow when they vote proxies and select and monitor proxy advisory firms.
The rule was proposed Aug. 31 and had a 30-day comment period that drew thousands of responses, including sharp criticism from the plan sponsor and sustainable investing community.
Based on the comments, the Labor Department said it was persuaded that the complexity involved in a determination of economic vs. non-economic impact would be costly to implement. Moreover, it believes the core structure of the proposal that focused on "whether a fiduciary has a prudent process for proxy voting and other exercises of shareholder rights is a more workable framework for achieving the objectives of the proposal."
At first look, George Michael Gerstein, co-chairman of the fiduciary governance group at Stradley Ronon Stevens & Young, said that although the rule is "probably somewhat more digestible" than the proposal on which it was based, it still presents challenges for fiduciaries and asset managers.
"The perceived skepticism of ESG by the current administration I think many view as being the impetus for the financial factors rule and this rule and that it was designed to target ESG in some way," Mr. Gerstein said, referencing a Labor Department rule that was finalized in October and requires ERISA plan fiduciaries to select investments based on pecuniary factors. "I think the DOL has at least attempted to allay those concerns but the devil is ultimately going to be in the details, which is whether the rule has enough clarity that it's not going to chill activity that was otherwise commonplace."
The final proxy voting rule makes clear that fiduciaries are not required to vote every proxy and outlines six points a fiduciary must undertake when making decisions on exercising shareholder rights, like proxy voting:
- Act solely in accordance with the economic interest of the plan and its participants and beneficiaries.
- Consider any costs involved.
- Not subordinate the interests of the participants and beneficiaries to any non-pecuniary objective.
- Evaluate material facts that form the basis for any particular proxy vote.
- Maintain records on proxy voting activities and other exercises of shareholder rights.
- Exercise prudence and diligence in the selection and monitoring of proxy advisory firms.
"The plan fiduciary must never subordinate the interests of participants and beneficiaries in their retirement income to unrelated objectives, including promoting non-pecuniary goals or benefits," said Jeanne Klinefelter Wilson, acting assistant secretary of labor for the Employee Benefits Security Administration, on a call with reporters Friday. "The rule aims to ensure that ERISA fiduciaries keep their eyes properly focused on the financial interests of ERISA plan participants."
The rule allows fiduciaries to adopt at least one of two policies, which the Labor Department refers to as safe harbors, in order to satisfy their responsibilities when deciding whether to vote proxies.
The first is one that notes that voting resources will focus "only on particular types of proposals that the fiduciary has prudently determined are substantially related to the corporation's business activities or are expected to have a material effect on the value of the plan's investment," the Labor Department noted in a fact sheet. The other is a policy of refraining from voting on proposals when the size of the plan's holdings in the stock subject to the vote are below quantitative thresholds that the fiduciary prudently determines.
On Friday, the early reaction to the final proxy rule was mixed, with proponents, like the U.S. Chamber of Commerce, voicing support, and opponents, like the CFA Institute, criticizing the Labor Department's efforts.
"The DOL's rule along with recent actions from the SEC, will ultimately help ensure proxy voting follows a transparent and unconflicted process," said Thomas Quaadman, executive vice president of the Chamber's Center for Capital Markets Competitiveness, in a statement. In July, SEC commissioners approved sweeping changes to the rules governing proxy advisory firms, including a requirement for those firms to disclose conflicts of interests to clients and allow companies that are the subject of voting advice to be able to access that advice before or at the same time as the advice is disseminated to clients.
Effective corporate governance regime is the hallmark of the U.S. capital markets, Jim Allen, head of Americas capital markets policy at CFA Institute, said in a statement.
"While we continue to carefully examine the final rule-making, based on our preliminary review," he said, "we remain concerned that the rule-making weakens investor stewardship practices, inhibits incorporation of material ESG factors, and unnecessarily disrupts a market-driven, cost-efficient and functioning proxy system."